Tax plan's message: mortgage the future for benefits today

ByEarl W. FoellNovember 26, 1985

Boston
— IN Western societies, a man's home is his castle. In America, his (or her) second home has become a second castle -- as inviolable as the first. This subject arises because of the understandable but shortsighted behavior of tax reformers in Congress. Rep. Dan Rostenkowski's House Ways and Means Committee recently voted in favor of more second castles and less retooling for America. The members did so by spurning proposals of earlier tax reformers to phase in some kind of upper limit on mortgage-interest deductions for second (or third) houses. At almost the same moment they voted to eliminate the investment tax credit, a stimulus for retooling U nited States industry.

That's one more example of mortgaging the future in the US to subsidize more comfortable mortgages in the present. It's not an isolated example. Lawmakers have taken roughly the same attitude on social security benefits -- present over future. And they have done more of the same by retaining incentives for consumer credit spending and disincentives for personal saving.

To put it bluntly, we promised ourselves in the 1970s that we would soon save more, invest more, increase productivity, be more competitive in the world market, and thus assure a high standard of living in the future. None of the promises were kept. We next promised ourselves we would turn it around in the '80s. That hasn't happened.

In the '70s we had the excuse of two oil shocks. In the early '80s it was the deepest recession since the Great Depression. Now we're well past those. We've had a longer-than-usual recovery. And still we procrastinate on a turnaround in saving, investing, retooling, productivity, and competitiveness. Personal savings are down. Some industries are modernizing, but many more must do so. By recommending that Congress discontinue the investment tax credit, Mr. Rostenkowski's committee is skewing incentives toward realty investment and away from investment in industrial renewal.

Our language abounds in clich'es which -- slightly revised -- describe such behavior: ``Eat, drink, and be merry, for tomorrow your grandchildren will pay.'' ``I know there's no free lunch -- so put it on my kids' charge account.'' ``He lived like [sic] there's no tomorrow -- and went on living that way the next day.''

Take a look at the second-castle question. Any of us (this writer included) is easily smitten by the idea of a vacation home, or perhaps a quick-profit condo. But if the House Ways and Means Committee keeps the slice of the pie labeled Real Estate Subsidy intact by cutting back the subsidy labeled Retooling America (the investment tax credit), what are we doing to ourselves and our children?

The second-castle decision is relatively unimportant by itself. That mortgage-interest deduction brings in only modest federal revenue. And wealthier taxpayers can easily work their way around any restriction in vacation-house deductions. But taken together with the cutback on retooling incentives, it becomes a telltale symbol. The lawmakers seem to be saying that building second houses (and excess skyscrapers) is more important than retaining incentives to modernize the machine-tool industry, the speci alty steel industry, plastics, textiles, and even the older high-technology industries. For some companies that means staying alive, competing at home and abroad, and providing jobs (even after robots and other computerized manufacturing systems are installed).

And, by not seriously examining some type of consumption-tax system and by not looking at any new savings incentives, Congress is also refusing to stimulate private saving and investment. The procrastination of the '70s and early '80s goes on.

This is not a partisan matter. The Reagan administration shares the blame with the Democratic House majority in many areas. Harvard University economist Benjamin Friedman asserts that ``we've used one set of mirrors after another. The Reagan administration claimed its economic policies would increase savings, increase investment, capital formation, productivity. They haven't. . . . Some economists argued that the strong improvement of '83-'84 marked a turning point. But now we are seeing it has been no more than a typical productivity rise in the business cycle -- perhaps a bit less.''

Fairness is crucial to a voluntary tax system. Therefore, anyone seeking to change mortgage-interest deductions on second homes should be careful to phase in the change over a long period. Any lawmaker proposing a consumption tax should exempt necessities such as food and clothing. Any leveling of the social-security burden between this generation and future generations should not tamper with benefits for retirees whose only or principal income is from that source.

The irony of the second-castle symbolism is that America already has more quality, first castles than any other major nation, but is losing its preeminence in machine tools, petrochemicals, and a clutch of old and new sectors that need high-tech retooling.

In contrast, Japan has done brilliantly at retooling but lags noticeably in housing. Each could profit from adjusting its tax incentives.